Utility maximization in incomplete markets with default

Thomas Lim and Marie-Claire Quenez
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Thomas Lim: PMA
Marie-Claire Quenez: PMA

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Abstract: We adress the maximization problem of expected utility from terminal wealth. The special feature of this paper is that we consider a financial market where the price process of risky assets can have a default time. Using dynamic programming, we characterize the value function with a backward stochastic differential equation and the optimal portfolio policies. We separately treat the cases of exponential, power and logarithmic utility.

Date: 2008-11, Revised 2010-07
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